“Stay the course” and “stick with the plan….”
When there is turbulence in the stock market, this is the sort of recommendation that Advisors often give to clients. Unfortunately, this advice can seem boring, trite, or pointless. Worse, it can lend an appearance that the Advisor has no ideas for dealing with the current market environment and is falling back on clichés. These reactions are understandable from an emotional perspective. When the stock market is falling, taking action – any action – may feel more satisfying than standing pat.
However, a look at the evidence reveals what many Advisors already know: “Staying the course” is one of the most valuable pieces of advice an investor occasionally needs to hear.
The chart below, produced by J.P. Morgan and based on an analysis by Dalbar Inc., shows the returns of many asset classes and balanced portfolios over the twenty-year period from 2001 through 2020. During this time frame, the average investor significantly lagged the performance of the stock market and typical portfolios. A central reason for this underperformance is that the average investor occasionally makes hasty decisions that deviate from his or her investment plan – often choosing to sell risk assets after a downturn or rotating into ‘hot’ investment ideas after a rally.
Research from the Vanguard Group also supports the value of adhering to a long-term strategy. The latest update to their influential ‘Quantifying Advisor’s Alpha’ research affirmed that around half of the 3% of value that an Advisor can add to investor returns comes from ‘behavioral coaching’. Among the findings: “Advisors can act as emotional circuit breakers by circumventing clients’ tendencies to chase returns or run for cover in emotionally charged markets. In the process, they may prevent significant wealth destruction and also add percentage points – rather than basis points – of value.”
To be clear, “sticking with the plan” requires that there IS a plan. This investment plan should be consistent with the client’s financial goals, circumstances, and risk tolerances. Significantly, any short-term or tactical flexibility in investment selection and timing should be considered at the time the plan is developed, not in response to events.
For those that are not convinced that “staying the course” is the best advice, I recommend considering the opposite. That is, imagine getting a call from an Advisor telling you “the Ukraine is being invaded – we need to sell now!” Would this truly be preferable? Could such a haphazard approach really be expected to provide the best long-term investment returns? The evidence says otherwise… Stick with the plan.